India set to hike rates amid rising inflation

India's central bank is expected to raise rates for a second consecutive month, fuelling concerns about rising global inflation.

Rate rises calling: A recent Vodafone launch in India, where business is booming

Investors have already priced a 25-basis point rate rise at the central bank's policy review on April 20 after it raised rates last month.

Data on Thursday is expected to show that Indian inflation breached 10% in March.
The Reserve Bank of India (RBI) had cited a lack of spare capacity in the economy for driving up inflation and analysts expect the central bank to try to cool demand until companies boost their potential output.

The central bank increased the reverse-repurchase rate to 3.5% on March 19 from a record-low 3.25% and the repurchase rate to 5 percent, saying inflation was 'stronger than anticipated'.

India is the world's second fastest growing major economy after China and is expected to grow 8.5% in the current fiscal year and 9% in 2011/12.

The country has not been alone in rising rates: Australia's central bank ordered another increase, from 4% to 4.25%, last week - its fifth such rise since October. Unlike most of the developed world, Australia avoided recession thanks mainly to its mining industry, which has benefited from the bounce-back in commodity prices.

Many economists expect Australian rates to reach 5% by the end of 2010 and 5.5% in the second half of 2011.

Malaysia raised rates in March while central banks in Norway and Israel ordered rises at the end of 2009.

Money markets are pricing in rate rise in Canada, where strict regulatory controls helped banks avoid the worst of the crisis, by June.

So what about the UK?

Inflation in the UK has risen faster than elsewhere in Europe or in the US. The Consumer Prices Index rose from a low of 1.1% in September to 3.5% in January. It then fell back to 3% in February.

But a leading investment bank warned last week that the UK will lead the western world in inflation this year, as VAT hikes and rising oil prices impact on the High Street.

The CPI, it said, will rise 2.4% in 2010, the highest rate in the G7 and nearly twice the 1.3% figure predicted for the eurozone, according to projections from Dutch investment bank ING. VAT has already been lifted back to 17.5%, and analysts at ING and other banks are already building further hikes into their inflation forecasts.

ING's warning followed an admission by OECD chief economist Pier Carlo Padoan that the BoE may be forced to raise rates 'a little earlier than elsewhere' because of inflation. The OECD's sensors were detecting a build-up in price pressures follow a series of positive economic indicators suggesting Britain's economy is recovering more quickly than expected.

The markets don't expect a rate rise until the very end of 2010, at the very earliest. Many say the initial rise may not come well into 2011. But if global inflation, driven by fast-growing Chinese and Indian economies, continues to pull the oil price higher, then inflation may become a problem and force the Bank of England to raise rates sooner.